4/06/2011 @ 3:00PM

Midas: The Methodology

Much has changed in the two years since Forbes last published its Midas List of top venture capitalists: Secondary markets surfaced. Founders deliberately dragged their feet to exit. Fresh competition emerged abroad and from a new flock of angel investors keen to sink small amounts in startups that needed less cash to grow. Others took a stab at their own lists of venture capitalists–ranking investors, not by exits or returns, but by soft metrics like social media mentions or anonymous reviews by entrepreneurs on TheFunded.com. Suddenly, it seemed, a VC was only as good as his last tweet.

Now, with returns sinking and countless firms puttering along on management fees alone, Forbes figured it was time to bring some sobriety back to the venture capital business. We worked with TrueBridge Capital Partners, a venture capital-focused fund of funds to develop a ranking formula that VCs and their limited partners could respect. Forbes and TrueBridge also introduced an expert panel of our very own Deep Throats–professionals from a premier global investment consulting firm and a leading foundation’s investment office–to inform our final ranking.

The goal of the 2011 Midas List is what it always has been: To identify venture capitalists that generate profits for their investors and help to build valuable technology and life science companies. To do this, we analyzed every disclosed M&A or IPO exit above $200 million over the last five years, using data provided by Dow Jones VentureSource. The venture capital industry is filled with blind spots and while VentureSource may not have perfect information, it is the most comprehensive and timely data source available. It is also worth noting that Forbes and TrueBridge put in considerable time and effort to verify and complete the data set. As in prior years, our ranking formula weighed most heavily either the first-day market capitalization of a venture-backed firm at the time of its IPO, or a company’s acquisition price if purchased by another corporation, giving recent exits greater weight. Along with transaction size, we still consider each venture capitalist’s level of involvement in nurturing each company to exit. Finally, a lesser weight is given to the change in value of an investment since going public.

We did make several noteworthy changes to this year’s analysis. To reward investors who saw potential for valuable companies long before profits, we gave early-stage investments more credit than later-stage deals. To weed out one-hit wonders, we incorporated a metric that rewards investors who deliver multiple exits. We also limited our analysis this year to venture-backed companies within the United States, Europe and Israel, with plans to publish a separate ranking later this year based exclusively on companies in Asia. In what may be the biggest change of all, we introduced a select group of highly valued private companies to this year’s data set. Those companies were selected based on their latest valuations in the Dow Jones VentureSource database, and a heavy illiquidity discount was applied to those valuations in our final ranking.

To complement our analysis we convened our expert panel four times over the course of two months. Investors moved at the margin based on his or her leadership within a firm, or sector, and his or her firm’s overall standing in the venture capital industry. With the number of venture capital firms actively investing on the decline and profits few and far between, the final Midas 100 represents a group of investors who buck current trends, create wealth and fund the new ideas that keep our economy vibrant.

Please note that bios may reference deals and current investments that were not included in our rankings.

Acknowledgments

A special thanks to our partners at TrueBridge Capital Partners. Its extensive knowledge of all things VC, plus its quantitative analysis, made this project possible. (Get TrueBridge’s take here.) TrueBridge Capital Partners was established in 2007 by Edwin Poston and Mel Williams as a niche-focused alternative asset investment firm. The firm uses a foundation- and endowment-like approach to portfolio construction, investing primarily in U.S. early-stage information technology companies, with some exposure to life sciences and to venture and growth investments in India and China. TrueBridge currently manages a series of venture capital and growth equity funds of funds.

Poston and Williams bring more than 25 years of experience in the private equity industry as investors, entrepreneurs, venture capitalists and transaction advisors. Poston, formerly the head of private equity and one of two managing directors at the Rockefeller Foundation, worked with a team to manage the foundation’s $4 billion endowment with a focus on building and managing its venture capital and buyout portfolios. Williams helped manage more than $2 billion endowment for the University of North Carolina at Chapel Hill, where he led all private investments. Before joining UNC Management Co., he was a two-time venture-backed entrepreneur, and an entrepreneur in residence at a Boston venture firm. Collectively the five-person TrueBridge investment team has reviewed approximately 2,400 alternative managers, including 700 venture managers. It has committed more than $2.5 billion to 235 alternative managers and managed more than $1 billion committed to approximately 45 venture managers.

The firm has a mutually exclusive partnership with the Kauffman Fellows Program, a nonprofit with a 15-year history of identifying, educating, mentoring and networking future venture capitalists. To date it has graduated more than 250 fellows, who have worked at venture firms domestically and abroad. As a result of this exclusive partnership, TrueBridge gains valuable access and insights into the venture industry. Click here for more information about TrueBridge. Click here for more about the Society of Kauffman Fellows.